Why Do Investors Pay Higher Fees for Sustainable Investments? An Experiment in Five European Countries

Abstract

We study why investors are willing to pay higher fees for sustainable investments using large-scale online experiments with individual investors across five European countries. We focus on two potential explanations - investors’ social preferences and limited financial literacy. We find that, across all countries, social preferences significantly contribute to the share of sustainable investments in investment portfolios. However, social preferences do not significantly influence investors’ sensitivity to fees. Instead, financially illiterate investors pay higher fees, because they pay less attention to fees and (wrongly) believe funds with higher expenses outperform after fees. These results have important implications for financial regulation.

Keywords: sustainable investments, experimental finance, financial literacy, cross-country analysis

JEL Classification: G11, G41, G53